Putting the NFIP to the Test

David Maurstad, FEMA

Following are excerpts from the keynote speech delivered by David Maurstad, Federal Insurance
Administrator and Director of FEMA's Mitigation Division, at the May 8 Opening Session of the 2006
National Flood Conference held in Philadelphia, Pennsylvania.

Almost a year ago, on the day that began the 2005 hurricane season, we were in Marco Island, Florida,
and I delivered my National Flood Conference keynote address. That conference's hot topic was the
2004 hurricane season, when four hurricanes crossed the State in which we were gathered.

We talked about the 75,000 NFIP claims those storms produced, totaling close to $2 billion in insured
damage. I mentioned how the Program exercised its borrowing authority, for only the fourth time since
1990, in the amount of $225 million. I thanked you for your hard work and I expressed my gratitude
for having the chance to work with our stakeholders and key players in the industry.

It rained that morning. It rained throughout the day and the rest of the week. It rained a lot. It
rained on the conference's last day as attendees drove to the airport. And the 2005 hurricane season
had begun.

We know what's happened since, and the partnership between FEMA-NFIP and the insurance industry
learned and grew together, stronger than ever. Together, we showed our country and our Gulf Coast
policyholders that the NFIP works.

Since Katrina struck the Gulf Coast last August 29, the insurance industry--companies, agents,
brokers, adjusters, vendors--as well as our other critical stakeholders--lenders, real estate agents,
regulators, floodplain managers--have provided me, the NFIP, and FEMA with invaluable support and
advice.

We've seen that sound floodplain management and mitigation, backed up by flood insurance, reduce
an area's potential for disaster after an event strikes. Destruction and distress are lessened,
which, in turn, facilitates effective response and promotes faster recovery. We have a
responsibility to remind the nation about the value of flood insurance. We can't let disaster
amnesia set in, only to have another Katrina slap us awake.

The Scope of Katrina's Destruction

Approximately 90,000 square miles--an area roughly the size of Oregon--and 1.5 million people were
impacted by Katrina. Louisiana, Mississippi, Alabama, and Florida were directly hit, and 44
states received emergency declarations following the storm, the most for any single disaster in
FEMA history. DHS, FEMA, and the Coast Guard coordinated the rescue of nearly 40,000 people.

Katrina displaced more than 771,000 people, and the peak shelter population following the storm
exceeded 267,000. This compares to a peak shelter population of 240,000 following the four 2004
hurricanes, combined. Clearly, Katrina's aftermath resulted in the most significant mass
displacement of the country's population since the Dust Bowl of the 1930s.

Within the first 6 days of Katrina's landfall, FEMA and other federal agencies delivered 28 million
pounds of ice and 4 million gallons of water. Five days later, 101 million pounds of ice and
11.4 million gallons of water had been provided. And Rita and Wilma had not yet been named.

In addition to DHS and FEMA response and recovery statistics, Katrina's magnitude is easily
conveyed with some insurance figures, which don't even include the NFIP numbers that I'll highlight
in a moment. According to Property Claims Services, Katrina, alone, damaged more than $38 billion
worth of insured property, resulting in 1.75 million claims. Overall, the six named storms that
struck the U.S. in 2005 (Cindy, Dennis, Katrina, Ophelia, Rita, and Wilma) damaged nearly $53
billion worth of insured Gulf Coast property, resulting in 3.2 million claims. For comparison's
sake, the 1994 Northridge, California, earthquake damaged $12.5 billion of insured property and
resulted in 430,000 claims.

The NFIP's Exposure

After reviewing Katrina's astounding magnitude from a DHS, FEMA, and insurance industry perspective,
it's easy for folks outside the NFIP to wonder how this program--being such a small element of the
Department of Homeland Security--could have a post-disaster role of any significance. Yet, the
country is learning that, with more than $800 billion in insured assets, and nearly 5 million
policyholders in more than 20,100 communities, thanks to a record 22 consecutive months of policy
in force growth, I might add, the NFIP plays a huge role in flood recovery, all the time,
everywhere.

The 2005 hurricane season raised the Program's exposure to new heights. And more people than ever
are learning about us--from the media, from their insurance agents, and from FloodSmart. What an
excellent opportunity to show our nation how the NFIP works. And it does work.

Hurricanes Katrina, Rita, and Wilma were unparalleled flooding events that struck the heart of one
of the Nation's largest policy bases. We expect the total NFIP payout for the 2005 hurricanes to
exceed $23 billion--$8 billion more than all claims paid in the Program's entire 38-year history.
For Hurricane Katrina alone, claims payments will exceed $22 billion.

Compare this $22 billion Katrina figure to Tropical Storm Allison, which, in 2001, became the
NFIP's first billion-dollar storm with a little over 30,000 claims totaling $1.1 billion. Or compare
Katrina with the four hurricanes that crossed Florida in 2004, resulting in more than 75,000 claims
totaling close to "only" $2 billion. Since the end of the 2005 hurricane season, the number of NFIP
claims filed by Gulf Coast policyholders has exceeded 241,000. Most importantly, more than 95
percent of these claims have been closed.

Facilitating Recovery

The challenges presented by the 2005 hurricane season--in terms of flood insurance claims
handling--have never been encountered on this scale before.

Immediately following Hurricane Katrina, I met with the insurance commissioners of Louisiana,
Mississippi, and Alabama--going over immediate concerns and discussing how FEMA would work with
their offices, the insurance industry, State and local officials, affected communities, and
policyholders in the months ahead.

I also worked closely with representatives from our 88 Write Your Own insurance companies,
holding weekly conference calls, discussing methods of streamlining claims processes, and
working through our financial challenges.

As you know, soon after Katrina struck, insurance companies had hundreds of adjusters on the
ground working to process flood insurance claims in the Gulf. I participated in post-event adjuster
briefings and training in Alabama, Mississippi, and Louisiana a week after Katrina hit, and I saw
firsthand the difficult and challenging circumstances that the NFIP, the insurance industry, and
adjusters were to face in the coming months. Limited access to the most flooded areas, curfews,
no lodging for adjusters, and standing water in structures for extended periods were just some of
the problems.

The 2005 hurricane season presented the NFIP with trials it had never seen. Fortunately, the
Program--because of our strong public-private partnership--is flexible, and after Katrina we worked
together to implement innovative changes that enabled us to better serve our Gulf Coast policyholders
when they needed help the most.

We waived our proof of loss requirement.

We worked with insurance companies to provide advance payments on contents coverage.

We identified claims categories that lent themselves to an expedited adjustment process,
allowing greater use of scarce adjuster resources, especially in the early weeks of the event.

When aerial mapping and other data indicated areas of total loss, WYO companies fast-tracked
claims payments up to the maximum insured value. For example, In New Orleans, where the levees broke
and there had been standing water for extended periods, there were many claims where it was readily
apparent that the damages would exceed the total limits of flood insurance purchased by the property
owner. In Mississippi, Alabama, and Louisiana, there were many properties where only a slab or
pilings remained and it was equally apparent that damages exceeded the limits of insurance
purchased. Through information already contained in underwriting files, other sources, and dialogue
with the property owners, these claims were adjusted without a site visit and without the customary
level of detailed documentation.

We estimate that 15,000 claims have been resolved through our expedited claims processes.

Finding Our Policyholders

Quickly adjusting and settling claims in the post-Katrina environment was one challenge. Finding NFIP
policyholders who had been displaced by the storm was equally daunting. In the days following
Katrina, the NFIP-insurance industry partnership worked closely to implement systems to contact
policyholders who were cut off from their usual sources of information and communication. We
cross-referenced a National Processing Service Center report of all callers who applied for disaster
assistance and who indicated they had flood insurance, matched the addresses of damaged properties
to NFIP policy addresses, and then connected insurance companies to their flood insurance
policyholders.

In our Jackson, Mississippi, Joint Field Office, we staffed a telephone Help Line with insurance
specialists to support all of the other FEMA/DHS Disaster Recovery Centers. This Help Line assisted
policyholders with their flood insurance questions and transferred callers to their specific
insurance companies as needed. Additionally, we set up a General Insurance Center, which, through a
toll-free 1-800 number, provided relocated policyholders with service access from anywhere in the
country. This center also answered claims and coverage questions, and guided NFIP policyholders
through avenues of recourse if they disputed their claims estimates.

Finally, to make sure that our policyholders were given maximum access to our services, we partnered
with the Insurance Information Institute's Disaster Insurance Hotline, which provided callers with
flood insurance information as well as their specific insurance company's direct phone number.

FIRA '04 Initiatives Deployed

The Flood Insurance Reform Act of 2004 (FIRA '04) fostered two important documents: the NFIP
Summary of Coverage and the Flood Insurance Claims Handbook.

Immediately following Hurricane Katrina, we distributed these documents to policyholders to help them
through the claims process. These materials have been available in our Joint Field Offices, Disaster
Recovery and Flood Response Centers, as well as distributed in Town Meetings.

The ability of the NFIP Summary of Coverage and the Flood Insurance Claims Handbook to clarify the
claims process for our Gulf Coast policyholders cannot be overstated. These materials, combined with
our systematic efforts to expedite claims and find displaced policyholders played a pivotal role in
resolving 2005 hurricane season flood claims promptly and fairly.

Several other critical elements of FIRA '04 also got under way in September:

Congress authorized funding for our Repetitive Loss initiative, and

We published educational and training requirements for agents who sell flood insurance.

Repetitive Losses

Phasing out subsidies for pre-FIRM structures and reducing the number of the nation's repetitive
loss properties have been significant elements of our mitigation strategy for some time. The Severe
Repetitive Loss Pilot Program required by FIRA 04 is in its final stages of development, and, last
fall, Congress authorized FEMA to transfer up to $40 million from the National Flood Insurance Fund
to mitigate these properties. This funding is in addition to the $28 million available in the Flood
Mitigation Assistance program. And, we recently released guidance on the new $10 million Repetitive
Flood Claims Program. Under the proposed pilot, if the owner of a "severe" repetitive loss property
refuses a mitigation offer, the flood insurance premium for that property will increase 150 percent.
This will be the first time that there will be adverse consequences for someone who refuses a
mitigation offer.

Agent Training

Property and casualty insurance agents are a critical part of the Mitigation Division's awareness
efforts, and their importance to sound floodplain management strategies cannot be overlooked. We
continue to encourage the states that already have minimum training and education criteria to
place these requirements in their licensing and Continuing Education programs. Moreover, for the
states that do not have education and training requirements, FEMA is committed to providing our
technical assistance and resources, as appropriate.

One such resource is the agent website (
https://agents.floodsmart.gov). As part of our FloodSmart marketing
and public awareness campaign, this website provides extensive information for flood insurance
agents, including links to educational and training programs.

Claims Appeals

As required by FIRA '04, FEMA has drafted a process through which flood insurance policyholders
may appeal the decisions of adjusters, agents, insurance companies, or FEMA regarding claim
settlements.

The appeals draft speaks to the issue of mediation, which is most effective when it occurs early
in the claims process. I am currently working with the FEMA Office of General Counsel on ideas of
how mediation may be expanded within the program.

I believe it is important to point out that the NFIP has long operated at a high success rate in
resolving claims without litigation. Again, this success can be attributed to our strong
NFIP-insurance industry partnership. We've successfully closed more than 300,000 claims in the
past two hurricane seasons.

The NFIP's Financial Forecast

Hurricane Katrina forced Congress to get real familiar with the National Flood Insurance Fund and
the financial matters that unavoidably arise when the nation's largest single-line property
insurance provider encounters the nation's most catastrophic flood event.

The NFIP had been financially self-supporting since 1986 for the average historical loss year.
Consistent with the law, during periods of high losses, the NFIP has borrowed from the U.S. Treasury.
These loans have been repaid--with interest--from the premiums and related fees collected from
policyholders, without cost to the nation's taxpayers.

Until last fall, 2004 claims activity represented the most significant loss year in NFIP history,
and the program exercised its borrowing authority in the amount of $225 million to cover these
claims. This was only the fourth time since 1990 that the Program was in a borrowing position.
Since Katrina, we've worked with Congress to increase the NFIP's borrowing authority three times,
to the present limit of $20.8 billion. That's 100 times the amount borrowed just a year ago to
cover the 2004 claims.

Our Obligation

As I update Congress with operational information and myriad statistics, I've emphasized the
following simple fact. Claims from NFIP policyholders whose homes and businesses have been damaged
or destroyed are not a new obligation--they are the result of a legal promise.

Homeowners and businesses pay premiums, communities adopt building codes to mitigate future flood
dangers, and the Federal government agrees to provide insurance coverage to policyholders after
they suffer a loss. Every single NFIP claim represents someone who did the right thing by
purchasing flood insurance. Every single claim represents a company and an agent who did the right
thing by making sure their customer was protected with an NFIP policy.

We not only have a legal obligation to honor our commitments, but we have a moral obligation to
provide the coverage the Federal government promised.

Map Modernization and ABFEs

If there is a silver lining around these daunting financial figures and issues, it's that Capitol
Hill knows more about the NFIP and flood insurance than they ever have. This includes the NFIP
flood map modernization initiative (Map Mod). In the aftermath of the 2005 hurricane season,
we're pushing forward with our 5-year, $1 billion initiative to modernize our Flood Insurance
Rate Maps (FIRMs). Halfway through the undertaking, we're making course improvements with an
adjusted focus that places greater emphasis on updating flood hazard data and verifying
floodplain boundaries. This emphasis will result in more detailed flood maps for those parts of
the country facing the greatest flood risk. As we make progress, we'll also implement a new
boundary standard that matches flood boundaries to the best available topographic information,
ensuring that inaccuracies in floodplain boundaries are corrected before paper maps are digitized.

Related to our Map Mod initiative is our new Advisory Base Flood Elevation (ABFE) policy.
Implemented for the first time following Katrina and Rita, our ABFEs provide an excellent example
of what we're doing to ensure that communities rebuild wisely. Hurricane Katrina reminded us that,
while flood risks in areas outside the mapped floodplain are not as great, these areas can
experience substantial losses. Rebuilding higher is often necessary. When ABFEs are provided to
communities post disaster--and they won't be developed after every event--FEMA now requires communities
to use ABFE rebuilding guidance for all reconstruction activities that involve FEMA mitigation and
public works grant programs. We've provided ABFEs to all the affected areas in Mississippi and
Louisiana. There is simply no sense in spending tax dollars to rebuild to outdated standards only to
have similar damage when the next storm comes along.

Changing the Future

Let me conclude my presentation by sharing a rather lofty goal of mine, a goal I'd like you and our
other flood insurance and mitigation partners to seriously consider joining me in reaching for. I
want to see all homeowners, renters, and businesses located in the nation's Special Flood Hazard
Areas (SFHAs) to be insured against flood, 100 percent. In the wake of the last two hurricane
seasons, it became apparent that people residing and working in floodplains don't have a clear
understanding of the risks they face. This lack of awareness is reflected by the substantial number
of Gulf Coast property owners who should have had flood insurance but didn't. We're estimating
that only 50 percent of Hurricane Katrina and Rita flood victims were insured through the NFIP.

Although the other 50 percent clearly faced significant flood risks, they, for whatever reasons,
weren't covered, and many of them lost everything. The Gulf Coast region isn't unique in this
regard. Unfortunately, this is the case across our great nation.

The current requirement that property owners with federally backed mortgages must have flood
insurance has certainly increased the number of policyholders in the SFHA. But, property owners
without mortgages, with other than federally backed mortgages, and--very important--renters aren't
touched with this regulatory scheme. We simply have an obligation to do better.

We certainly have a foundation to work from: more than 20,100 NFIP communities and over 1,000 CRS
communities are working daily to reduce their vulnerability to flooding. We have 88 Write Your Own
insurance companies that understand the NFIP and have helped us operate effectively under extreme
and difficult circumstances. Thousands of agents. Thousands of adjusters. We have banking and lending
associations whose members work regularly with the mandatory purchase of flood insurance guidelines.
We have the Association of State Floodplain Managers, the National Association of Flood and
Stormwater Management Agencies, and 50 State Insurance Commissioners.

The goal of insuring all SFHA homeowners, renters, and businesses is daunting, but that doesn't mean
we shouldn't pursue it. Through teamwork and perseverance, a strong partnership should be able to
design a comprehensive effort that will not only educate our at-risk population, but will provide
them with reasonable flood insurance options that would be difficult to ignore. Hurricane Katrina
showed us all what can happen, and what will happen again.

The 2005 hurricane season presented us with substantial challenges that we'll be addressing for
years to come.

In the midst of all the exposure and scrutiny, the challenges and opportunity, an important fact
has become apparent to me: the NFIP works. Congress now clearly understands the NFIP and the fiscal
issues that surround the Program, and we're working with Capitol Hill to make the NFIP stronger.
We're modernizing our flood maps and providing Gulf Coast communities with the information they
need to rebuild stronger and smarter.

However, it is time to go to the next level with our efforts to reduce the nation's vulnerability
to floods. Let's focus our partnership's strengths on making sure that all homeowners, renters,
and businesses located in the nation's floodplains have flood insurance. Let's start reaching for
this goal now, with well-planned objectives, so that when the next Katrina strikes--or for that
matter, when the next flooding event happens in any of the 20,100 participating
communities--100-percent coverage in flooded high-risk areas will simply be a matter of course.

Now serving as Federal Insurance Administrator and Director of FEMA's Mitigation Division, David
Maurstad was once Mayor of Beatrice, Nebraska, served as a Nebraska State Senator, and later held
the Office of Lieutenant Governor of Nebraska. He joined FEMA in 2001 as the Director of the Region
VIII Office.